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Practical Valuation & Funding Tips for Biotech Startups

Posted11-30-2016 2:07 PM

MassBio members and Back Bay Life Science Advisors recently participated in a dynamic discussion around biotech valuation and funding to dissect value placed on early stage biotech companies and identify opportunities, threats and tips to secure funding in this complicated, but optimistic, landscape.

Led by industry experts, MassBio’s Entrepreneur's University: Valuation & Funding, offered academia, hospital and early stage venture and corporate development perspective. Members of the Back Bay Life Science Advisors team joined the discussion, with insight gleaned from many years of advising biopharma companies through every stage of development, across billions of dollars of valuation and funding activity.

As a panelist, I was most impressed and grateful for the effective advice constructed by the group – and for the overall sense of optimism for the road ahead. It is exciting to be on the forefront of this field and to see so many seed stage companies sprout.

Throughout the discussion, we recalled that “placing value on early stage companies requires a delicate balance of optimism and realistic cross-checks.” From this point, we assembled practical advice for early stage companies, including:

Define a near-term inflection point that will increase value and ability to raise the appropriate amount to achieve that goal (with the caveat: plan on six months of selling, general and administrative expenses runway to your most conservative costs. Everything takes longer than expected).

Brag about all your accomplishments to date but define what your company has achieved and what is still “to be determined.” Ultimately, this will help define similar stage companies for funding and valuation comparisons.

Conduct a full valuation analysis, which will be fraught with near and longer term assumptions, but the process is important to show investors an understanding of the total market size, realistic market share within that market, and the costs and time to get there. Ultimately, this should fall within the range of comparable company’s value at similar stages of development.

Look for similar stage companies in similar markets or industry sectors to help to cross-check your valuation. Inevitably, a similar company has paved the way for you. Although “rules of thumb” were strongly cautioned against, the general consensus was that it’s very challenging to define value in a very early stage company. For a nascent company, a reasonable valuation is likely to be $1-2M.

Find investors that fit your company, a precept we live by at Back Bay Life Science Advisors. There are many different types of investors: many are interested in early stage companies with clear social missions. These investors may be more challenging to find so networking is key.

The MassBio panel also covered key activities to increase near-term odds of funding:

Although every industry is unique, the most significant value inflection for an early stage pharma/biotech company is to reduce risk by taking the time to define and demonstrate your key value proposition in the most feasible near-term way possible. We often recommend steps, including using stage funding from comparable companies, learnings from investor discussions to date, team analysis of the value proposition, and using novel benchtop models, such as preclinical in vitro and in vivo models, and user preference testing.

Defining a clear path to technical de-risking your value proposition requires building the optimal team. If possible, use resources supplied by local academic institutions and start-up communities but also remember to be scrappy and look for experienced and efficient experts looking for a lean start-up experience. A range of experience and perspectives will provide useful internal checks for nest steps and moving forward quickly.

It’s an exciting time to be a young biotech company. There’s a whole new world of opportunity for funding and productive partnerships as biotech and pharma attracts a wider swath of interested parties from an array of public and private arenas, including academia, European and U.S. small public-private companies, and privately funded foundations. Back Bay Life Science Advisors will delve more deeply into the new partnering landscape in future blog posts.

In the meantime, these valuation and funding insights can ready young companies for the road ahead and create a pathway to find long-term success – which benefits the entire industry.

About The Author

Susan Thompson

Susan Thompson, PhD serves as engagement manager at Back Bay Life Science Advisors, a Boston-based organization that provides strategy consulting and financial advisory services for the life sciences industry. Dr. Thompson collaborates with the physicians, former biotech executives, clinical and scientific investigators and investment bankers that form Back Bay, to provide clarity for the toughest strategic decisions that drive growth and value creation.
Dr. Thompson joined Back Bay from the Biomedical Engineering PhD program at Johns Hopkins University. As a graduate student, Dr. Thompson managed multiple collaborations across the schools of engineering, medicine and physics to generate supporting data for a novel mechanoelectric coupling hypothesis that quickly gained traction in her field of cardiac electrophysiology. She is also the CEO and founder of a start-up company centered on her innovative idea for a consumer medical device. She has raised significant funds through individual angels, crowdfunding and a phase I SBIR grant and managed prototype development, IP generation and clinical trial execution. Dr. Thompson was named as one of the “2016 Medtech Boston 40 Under 40 Healthcare Innovators."
Since joining Back Bay, Dr. Thompson has worked extensively across the biotech and pharmaceutical industry, with multiple assignments in neurology, orthopedics, women’s health and diagnostics.
Dr. Thompson holds a PhD in biomedical engineering from Johns Hopkins University and a BS in mechanical engineering from University of Maryland, College Park.